Blow for Inland Revenue over husband and wife remuneration

A landmark court victory for Arctic Systems - a family business where two partners split their remuneration to reduce their tax burden - could cost the taxman hundreds of millions.

The Revenue & Customs objected to how the couple used their salaries and dividend payments to reduce their tax bill. In the year in dispute, the company had a turnover of £91,000 largely derived from Mr Jones's work for the company. He drew a salary of £7,000 and his wife drew a salary of £4,000 for administrative work. The couple shared the remaining £60,000 in dividends equally between them since both were shareholders.

They paid less tax and national insurance because they took dividends rather than bigger salaries and a greater portion went to Mrs Jones to use up her lower income tax rates. This is common practise for thousands of small husband and wife operations.

The Revenue ruled that income from company dividends, received by a non-earning or low-earning spouse who is co-owner of the business, should be taxed at the same rate as the main earner's income. The original court hearing found in favour of the Revenue but a Court of Appeal overturned the verdict on Thursday.

The Inland Revenue may appeal to the House of Lords but in the interim it will issue guidance in time for January's tax filing deadline. The Revenue is coming under increasing pressure to stop imaginatively interpreting existing laws to increase taxation. The Arctic Sysytems case hinged on a law that was written in the 1930s and had never been applied to the 'husband and wife' situation in its six decades of existence. The Appeal Court judge made it plain that the government must introduce new legislation if it wants to increase taxes.